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Analysts Shrug Off Jitters,
Expect Stocks to Rebound

Asian stock markets look set to shrug off Friday's hefty losses and recover much of their poise this week, experts say.

By staff reporters Robert Steiner in Tokyo and Erik Guyot and Sara Webb in Hong Kong.

Optimism still abounds in some of the region's markets, even though indexes around the world dropped Friday on a wave of selling by jittery investors after U.S. Federal Reserve Chairman Alan Greenspan alluded Thursday to the dangers of escalating asset values. His cryptic comments were seen by many observers as a coded warning that the Fed felt the U.S. stock market had rallied too far, too fast.

But with fears of an immediate rise in U.S. interest rates assuaged by the release Friday of employment figures indicating little evidence of inflationary pressure, many analysts are focusing once again on the factors that could continue to buoy Asian stock markets.

Upbeat economic prospects have fueled rises in several markets, particularly in Hong Kong and China. Flows of money into U.S.-based international mutual funds have also propelled stocks throughout the region.

Provided U.S. interest rates don't rise, hobbling dollar-linked markets around the region, a correction on Wall Street could actually prolong bull runs in Asia if investors take profits in the U.S. and look for somewhere else to put their money. Already, some analysts say, they are seeing institutional investors rebalancing their portfolios by putting a greater percentage into Asia.

But optimism wasn't the order of the day Friday, when fears of a rise in U.S. interest rates drove stocks down 2.9% in Hong Kong and 3.2% in Tokyo. Markets in Sydney, Singapore, Jakarta, Kuala Lumpur, Bangkok, Manila and Taipei also fell on Greenspan's comments.

On Wall Street, the Dow Jones Industrial Average initially fell as much as 140 points but later picked up, helped by the favorable employment figures, and ended the day down just 55.16 points or 0.86%.

The recoup of some of those losses in New York, and the belief that the Fed won't, after all, raise U.S. interest rates anytime soon, now prompts many experts to predict that Asian markets will recover during the next few days.

"The markets overreacted -- there should be a bounce" across Asia, says David Robinson, regional investment strategist at HSBC James Capel Asia Ltd. in Hong Kong.

However, it may not necessarily be a smooth ride. Especially in Hong Kong's red-hot market, investors can expect more white-knuckle swings in coming days.

Even one of this territory's most famous bears, fund manager Marc Faber, who predicts the Hong Kong market will crash in coming months, says that Monday the index "will likely rebound simply because New York closed reasonably well" Friday.

Many managers of regional funds are reluctant to switch out of Hong Kong, where the Hang Seng Index has rallied by about 30% this year, because it is close to the end of the year when asset managers' annual performance is assessed, says Keith Wu, head of Hong Kong and China research at Peregrine Brokerage Ltd. "People aren't willing to sell (Hong Kong) below 13000 unless they see clear signals on interest rates" rising, Mr. Wu says.

However, analysts say Friday's panic selling was a stark warning that the Hong Kong market has grown more volatile and risky as speculative trading has increased sharply. In recent weeks, retail investors have swarmed into the market, bidding billions of Hong Kong dollars to subscribe to initial public offerings by small, relatively unknown companies. "The amateurs are in" says BZW's Mr. Hart. "The retail punters add to the riskiness of the market." Peregrine's Mr. Wu also predicts more volatility, but he says he doubts the index will be dragged below 12600 during the next few weeks.

Improving economic fundamentals and growing optimism about Hong Kong's return to Chinese rule in July are both helping to underpin the market, analysts say. On Thursday, Hang Seng Bank predicted that Hong Kong's gross domestic product will rise by 5.4% next year, up from the government's forecast of 4.7% this year.

Sentiment has also been bolstered by China's improving economic situation, with Beijing gradually easing its tight monetary policy. Reflecting the China optimism, the shares of many so called "red chips," often companies controlled by Chinese state entities, fell on Friday by less than the blue-chip Hang Seng Index.

A correction in New York could topple Hong Kong stocks, analysts warn, but until then, Mr. Hart says, "Hong Kong has been everybody's favorite market in Asia now for three to six months. It is difficult to see why that should change."

Meanwhile, in Tokyo, the Nikkei 225 Stock Average should continue to hover between 20,000 and 23,000 points in the coming year, many analysts say -- even if U.S. stocks tumble.

Even as Japanese stocks fell Friday afternoon, J.P. Morgan Securities Asia Ltd. rushed a fax to its clients, advising them to buy shares if the Nikkei 225 average of blue chips dipped below 20,500. Share prices should bounce back from those levels because "large-cap companies will pull off formidable earnings surprises in the coming six to 12 months," wrote Jesper Koll, the firm's Japan strategist.

His advice came at just the right time, as the Nikkei edged toward its Friday close of 20276.7. News of Mr. Greenspan's Thursday speech had frightened many investors in Japan, who still recall how Japan's central-bank governor brought stocks crashing down at the end of 1989. On Dec. 25 that year, the new governor warned Japanese that their stock-market rally was getting out of hand. Five days later, after hitting an all-time high of 38,915.87, the Nikkei collapsed and still hasn't recovered.

"Japan is closer to a 'sweet spot" for equities than the U.S.," says Mr. Koll. "The biggest point is that in the next six to nine months the economic cycle will surprise on the upside."

Paul Sheard, strategist at Baring Asset Management (Japan) Ltd., was thinking along similar lines even as Mr. Koll's fax churned though his machine. Thanks to Japan's loose monetary policy and declining inventories, he says, "we are getting quite a nice production rebound," which should support a 19% jump in corporate earnings this year over last -- about twice the rate expected by many Japanese.

That means Japanese stocks, once known for prices that stood at about 70 times their earnings per share, now carry prices closer to 30 times the earnings that Mr. Sheard expects to see in the year ending March 31, 1998. Still, those prospects probably won't push up Japanese interest rates much. Mr. Koll and others argue that the economy is growing too slowly for inflation to be a problem.

So if stock prices on Wall Street drop in coming weeks -- even if Japanese stocks tumble behind them for a while -- Tokyo's fall should be shorter-lived. Baring Asset Management says the Nikkei could hit 23,500 within the next 12 months.

Japanese institutional investors "provide a sizable cushion" of potential buying in the event of any sudden sell-off, Mr. Koll says. The most powerful institutions are life-insurance companies, and they need to earn between 3% and 4% on their investments every year to pay their policy holders. Japanese bonds, once insurers' investments of choice, now yield less than 3%. To improve their long-term returns, they'll have to invest more money in stocks, analysts say.